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Home prices have continued to rise throughout the country, though for most markets, at a slower pace. Most markets are still at normal price levels or undervalued, according to the CoreLogic Market Condition Indicators. However, the number of overvalued markets among the nation's top 100 cities is up to 14 as of Q2 2015, double the number from Q1 2015, with Texas leading the charge - five of its six top markets are overvalued.

Table 1 shows the 14 overvalued markets of the top 100 metropolitan areas in the U.S. Home prices in five Texas markets are well above their historical peak levels partly due to strong job growth and to the absence of the severe boom-bust housing cycle that was seen elsewhere. Between 2006 and 2014, the oil and gas boom had fueled job and population growth in some markets, pushing home prices well above their sustainable levels in these markets.

Since last year, geopolitical events have shifted in favor of excess oil supply, possibly exerting further downward pressure on oil prices in the next few years and impacting some of these Texas markets. The areas that have become overvalued since Q1 2015 are: Cape Coral, Fla., two Tennessee markets: Knoxville and Nashville - Davidson - Murfreesboro - Franklin, Philadelphia, Silver Spring - Frederick - Rockville metro in Maryland and Denver - Aurora - Lakewood in Colorado. As home prices have risen significantly since 2013 in these markets, homes have become less affordable, and therefore, more susceptible to decline in the event of rising mortgage rates, an economic downturn or a building boom.

Although the number of overvalued markets doubled, and despite significant home price growth since 2012, most markets are still well within sustainable levels, with many still recovering from the market collapse. At the national level, the housing market is expected to remain within normal levels of the long-term sustainable level through 2017, with most of the top 100 markets normally valued. Figure 1 shows the population-weighted average of the gaps between home prices and their long-run sustainable levels in the largest 100 markets. During the housing bubble from 2005-2007, home prices were significantly more than 10 percent above the long-run sustainable levels. During the market collapse, home prices quickly fell more than 10 percent below sustainable levels during late 2010 and early 2013 as a substantial number of distressed sales depressed prices. Subsequently, as home prices have continued to rise, the gap has narrowed to 3.6 percent below the long-run sustainable level in June 2015. By the end of 2017, the gap between the CoreLogic Home Price Index (HPI) and the sustainable level is forecasted to be 1.5 percent, meaning that, on average, homes will be fairly valued through the end of 2017.

CoreLogic Market Condition Indicators evaluate whether individual markets are undervalued, at value, or overvalued, by comparing home prices against the long-run sustainable levels that can be supported by local market fundamentals, such as disposable income. Because most homeowners use their income to pay for home mortgages, there is an established long-term relationship between income levels and home prices. Over shorter periods, home-price growth can exceed or fall below income growth, but over a longer time, home price growth cannot be sustained above income growth indefinitely because housing would become unaffordable. Demand would decrease causing home price growth to either slow down or decline, thereby realigning with income levels. In each market, CoreLogic calculates the gap between actual or forecasted home prices and their long-run sustainable levels. Using 10 percent as the threshold, we define an "overvalued market" as one in which the home price is more than 10 percent of its long-run sustainable level. Similarly, an "undervalued market" is one in which the home price is less than 10 percent of its sustainable level.

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